Weekly 10022011 as the World Churns

8/4/2019 Weekly 10022011 as the World Churns

1/14

Weekly 10022011

Global

There has been no deleveraging over the last three years. In fact global debt to GDP hascontinued to rise and now stands at a staggering 300%. While governments have been

mainly responsible, corporate debt levels have not fallen either surprisingly. He (David

Roche) observes pertinently that with government debt at 100% of GDP by itself it means

that even small changes in growth can have a big impact on indebtedness. Write up on

Independent Strategys David Roche

If you spend twenty years privatizing the gains but then one year decide to socialize all the

losses, it is no surprise when the validity of free markets is questionedHarvard Universitys

Michael Sandel these quotes courtesy CLSAs Bits and Pieces

United StatesLakshman Achuthan ofECRItoldBloombergRadio this morning the US is "tipping into a newrecession."

He told Tom Keene that a recession is the "overwhelming message coming out of our forward-looking indicators."

And more ominously: "It is not reversible.""There is virtually nothing that can be done to avert

what is going to happen," he said.
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Achuthan cites "dozens of leading indexes for the U.S." and "contagion in what is going on

among those leading indicators. It's wildfire, it's recessionary, it is not reversible."

He added that he "wouldn't be surprised" if unemployment rose to double digits, and said that

exportswhich had held up the economy earlier in the yearwere about to go down the tube.

Read more:http://www.businessinsider.com/lakshman-achuthan-says-us-going-into-a-new-recession-2011-9#ixzz1ZSLYogrg

The Infinium indicator for liquidity cycle which slightly leads or or coincides with the ECRI

leading indicator that Achuthan refers to is still not giving any bullish signals. The indicator

which had consolidated some just moved back out to extremes which also confirms Achuthanscomment of no turn in sight.

The sudden drop this week is the result of the tech and discretionary sectors weakeningsignificantly.

David Stockman: Blame The Fed!

Submitted byChris Martenson
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3/14

David Stockman, former US Representative and Director of the Office of Management and

Budget under Reagan, does not mince words. He sees the monetary systems of the world comingapart.

How did we get here? He identifies the root cause as the intentional over-leveraging of world

economies by central planners in a misguided effort to enjoy growth without consequence.

I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let

the dollar float. Because out of that has evolved -- or morphed -- a central banking policy in the

world that absorbs unlimited amounts of government debt. And so we went on what I call the "T-

bill standard" or the "federal debt standard." And the other central banks of the emergingmercantilist Asian economies -- Japan, Korea, and now, especially, the Peoples Printing Press ofChina -- have absorbed this massive emission of debt that otherwise wouldve created powerfulnegative consequences that wouldve forced politicians to act long ago. In other words, higherinterest rates, pressure for inflationary monetary policy, and the actual appearance of priceinflation. But because all the bonds on the margin were being absorbed by the central banks, we

got away for twenty or twenty five years with deficits without tears.

And he's just getting started. The only thing more impressive than Stockman's CV of insider

roles in public economics and private finance is his talent for colorful metaphor.

This is just a short portion of the Stockman interview which is excellent. Go to link for fullversion: audio 47 minhttp://media.chrismartenson.com/audio/david-stockman-2011-09-30.mp3 or herefull transcript

Speaking of the Fed the market is anticipating the beginning Monday of Operation Twist

Short rates up long rates down. Oh glory, our problems are solved!! Or not.

Europe
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4/14

Capital Economics Report: On the face of it, developments last week might have suggested thatpolicymakers are inching closer to resolving the euro-zone crisis. However, the most radical suggestions

have come from outside the euro-zone and not within it. Steps that have been taken or proposed so far

have caused growing tension not just between euro-zone governments but also within them, meaning

that some form of euro-zone collapse seems more and more likely. The next item seems to reinforce this

view.

German Finance Minister: We're Giving $283 Billion To The EFSF And"That's It. Finished."

German Finance Minister Wolfgang Schaeuble ruled out a larger German contribution to the European

Financial Stability Facility in an interview published Saturday, according toSky News.

"The European Financial Stability Facility has a ceiling of 440 billion euros, 211 billion of which is downto Germany. And that is it. Finished,'" he told magazine Super-Illu.

This is the latest in a string of comments from Schaeuble that have wrecked hopes for an EFSF capable of

recapitalizing European banks or taking on larger debts from peripheral Europe.

Denmark to Provide Banks $72.6 Billion Liquidity Lifeline

Sept. 30 (Bloomberg) -- Denmarks central bank said it will provide as much as 400 billion kroner ($72.6billion) as part of an extended collateral program to provide emergency liquidity to the countrys banks.

100% Debt Discharge Decision In Greece Sets Troubling Precedent For Local BanksSunday, October 02,2011 3:00 AM

A very disturbing precedent, for the already frayed domestic financial system, was set in Greece over the

past few days, where as the linked story from On-News.gr explains, an unemployed Greek woman whoowed a little over 26,000 euros to two banks, Eurobank and National, received a full debt discharge on

her outstanding loans. As the blog logical concludes, this decision will probably be adhered to in

thousands of similar cases. Furthermore, it should be noted the woman had a perfect payment record for

18 years, and only fell behind when she lost her job. Imagine the sheer panic that would ensue if a

comparable legal decision vis-a-vis ordinary consumer debt were to occur in the US - that would be a

supreme court resolution for the ages. In the meantime in Greece, a one-two punch arrives: deposits being

drained and moved overseas, and bad loans being outright erased from the balance sheet by court order.

At least both sides of the balance sheet are declining so there will be no way for banks to fudge their

capitalization and make it seem that loan writedowns are actually a beneficial thing for book equity.

Goldman's European Clients Are Oblivious About Developments In Europe

Goldman head strategist observes a rather curious psychological schism, notably as pertains to investor

sentiment regarding the financial powderkeg known as Europe. Namely that while US investors just

need to read a Euro-negative headline to sell everything, in Europe Goldman's clients are largely

oblivious of any and all adverse developments. To wit: "Our meetings with clients in Europe and the US

during the past two weeks showed investors in continental Europe to be more composed about the

direction and pace of policy decisions. US and UK investors are far more anxious about potential policy

solutions and the cumulative impact of a drawn out resolution." We wish we could recreate the
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European nonchalance, in no small part predicated by the general mindset of a socialist backstop to

another global collapse, which in case of failure, will simply mean the activation of US-based FX swap

lines, and thus America would have to bail out Europe once again like it did back in 2008. In retrospect

we can see why nobody in Europe is too worried. Also, perhaps Goldman should do a better job at

distributing the report byits own Alan Brazilsaying Europe is doomed...

Kash Mansouri recently posted this very useful table showing the big current account deficits racked up

by the PIIGS nations from 2000 to 2007. The worst five countries from a current acount perspective were

exactly the PIIGS: Portugal, Greece, Spain, Ireland, and Italy.

Given that a negative current account balance is a negative for growth, it's obvious that thesecountries had to fill the gap with deficit spending, because in the absence of natural trade

adjustments, there was no other way to keep growth up.

All of this is a good reminder about the absurdity of German or Finnish anger at the bailouts: For

years they've enjoyed big trade surpluses with their neighbors, allowing them to grow without

racking up huge debts. Now of course they're furious at the idea of money going in the other

direction.

Ultimately, any "deal" that just addresses the acute financial crisis without getting at this issue is

going to fail pretty soon.Read more:http://www.businessinsider.com/the-fundamental-problem-in-the-eurozone-trade-

2011-9#ixzz1ZSCQO6Qc

The weekly chart of the Eurostoxx below shows the market has pulled back almost to the lows of

2009.
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6/14

China: new negative tone in business news

A significant amount of commentary questioning the optimism of the China story hasbegun to appear right on time following the market declines in Asia last week. Remember the

news follows the market not the other way around.

Further signs that people are ultra-nervous: Chinese sovereign CDS have hit their highest level in

2 years.

The news story just below is the first anecdotal story to get big play.

Subprime crisis sweeps Wenzhou as bankrupt bosses fleeBy Lydia Chen | 2011-9-23 | ONLINE EDITION

THE east China city of Wenzhou is battling its own subprime crisis after seven local business owners fled recently, leaving

thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan.

Most of the runaway bosses who have disappeared since September 12 are in the manufacturing industry, according to today's


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National Business Daily. Each of them had borrowed hundreds of millions of yuan from banks and private creditors.

Subprime lending in Wenzhou, the cradle of China's private economy, has been booming since the country tightened its money

supply late last year to curb soaring inflation. State-owned banks are ordered to stick to a mandatory loan-to-deposit ratio and arereluctant to offer loans to small firms like those in Wenzhou over default risks.

The closed door to bank borrowing has forced some business owners to turn to private lenders, mostly illegal, despite the higher

costs of their loans.

But when their business failed to perform as expected and it became obvious that the bankrupt business owners would not be ableto pay their debts, some decided to flee.

Hu Fulin, whose Zhejiang Center Group was one of China's biggest eyeglasses maker, is one of the runaway bosses. He said hewas unable to bankroll this company's operation any more, the newspaper said.

Hu ran a company with 3,000 employees in Wenzhou and used to be one of the city's high-profile gurus. His company owns thebest-selling sunglass brand in China and produces 20 million pairs a year, according to the company's website.

Hu also expanded into the real estate and solar energy industries. Sources close to him said Hu called them on Wednesday

morning, admitting he is now broke.

The news of Hu's disappearance triggered a panic among his suppliers who gathered in his factory demanding payments.

National Business Daily said Hu also owed about 10 million yuan of salary to his employees for the months of August andSeptember.

Wenzhou City government has set up a task team to Hu's company to resolve the debt issue.

Meanwhile, another Wenzhou business owner, Zheng Zhuju, has been held in police custody since September 13 on charges ofillegal business operation.

Zheng allegedly owed 280 million yuan to private lenders and banks and tried to disappear from Wenzhou with tens of millions

of yuan, according to the city police.

The 49-year-old woman is the founder of a Wenzhou home appliances chain store, selling products from Siemens, Sony, LG,Midea and Haier, the police said.

Uh-ohs. China property and China banking.

Our positive view on Chinas banks has been a bad recommendation, and we are throwing

in the proverbial towel. We are focusing less on stated financial statements of banks and

more on concerns which appear to be arising more so of late with corporates and property

.. Where property is nearly all underlying collateral for banks, this is of concern.Head of

Financials research, Daniel Tabbush

One alarming message on the China property market from the IF has come from CheungKong. The company stated that they are receiving proposals from developers wanting to sell

the entire company almost on a daily basis as funding for property is virtually non existent

for any property projects that are not undertaken by an SOE. Cheung Kong describes thecurrent landscape in China as a land buyers dream. Meanwhile observations from thepost-forum property tour of two second/third tier cities Hefei and Changsha suggest the

physical market will turn worse quickly before it turns better .. Sentiment on the ground isweakening quickly. Head of Regional Property research, Nicole Wong

Note this first week of October is Golden week and china will be closed all week.


8/14

Note from David Port:

Different thread but look at copper recall the stories a while back about how Chinese were

circumventing PBOC lending restrictions by using copper as collateral for trade finance although they

tried to curb it in August. Nothing like a drop in collateral values to really curb it though.

David is referring to an item we saw in mid summer indicating that some of the huge

amounts of copper flowing into China was being used as collateral for loans that evaded thetightening on real estate loans. A curbing of real estate loan demand in the non-bank

funding market would hurt cooper demand and would possibly put supplies in surplus andpressure prices even more. That chart above of copper makes it appear that is what is

happening now. I would be reluctant to bottom pick copper or any industrial metals until thePBOC announces easing off of the tightening programs.

Week Ahead

What to watch for this week: North America

In his testimony this Tuesday, US Fed Chairman Ben Bernanke will try to sell the benefits of Operation Twist to

Congress. He will probably also reaffirm that the Fed will take more action if necessary. Meanwhile, we expect that

the two ISM activity surveys (Monday and Wednesday) stayed above the boom/bust level of 50 in September. But

payroll employment (Friday) may have been unchanged once again last month. (Paul Dales)

In Canada, the week ahead will be dominated by employment figures for September (Friday). We estimate that

employment rose by 21,000, with the unemployment rate unchanged at 7.3%. (David Madani)


9/14

Continental Europe

This weeks main event will be the ECBs policy meeting and press conference on Thursday. The Bank is likely tostrike a dovish tone, hinting at interest rate cuts to come before long. But it will balk at suggestions that it might

finance a radically expanded EFSF. (See our ECB Watch, published 29th September.) Meanwhile, euro-zone

finance ministers will discuss the possibility of leveraging the EFSF at their meeting on Monday (16.00 BST), but

are unlikely to reach any conclusions. The Netherlands and Malta are likely to ratify the earlier enhancement of theEFSF in votes this week.

Meanwhile, data will probably reveal that the German industrial slowdown (Friday) has intensified, while euro-zone

retail spending (Wednesday) remains weak. (Jennifer McKeown)

UK

The release of the quarterly national accounts this week seems likely to receive more attention than usual. Not only

will they contain the first expenditure breakdown of Q2 GDP (Wednesday) which would normally have been

published earlier, but the older GDP figures are also likely to be revised significantly as a result of methodological

improvements. It is unclear what these revisions will show. Some forecasters have speculated for a while that GDPwould be revised up in time, but we are not convinced by their arguments. And even if the estimates of GDP are

revised up, they would not necessarily point to less spare capacity and may even point to weaker inflation pressures

ahead.

Investors attention is also likely to focus on Thursdays MPC meeting. Even if the Committee holds back from announcing more QE this month, an extension in November would still look likely. (See UK MPC Watch, to be sent

on Monday.) Meanwhile, Septembers CIPS manufacturing (09.30 BST) and services (Wednesday) surveys seemunlikely to show that growth has picked up much following the sharp slowdown indicated by the surveys in August.

And on Friday, Septembers producer prices figures may show that industrial cost pressures are less intense thanearlier this year. (Samuel Tombs)

Japan

The main event this week will be the publication of the Bank of Japans Tankan survey for Q3 (00.50 BST). Giventhe poor state of the economy at the time of the last survey it would come as no surprise if conditions in Q3 had

improved. More interesting will be businesses expectations of conditions in Q4. The latest economic data have beenvery disappointing and suggest a slowdown in the fourth quarter. These concerns will feed into the monetary policy

decision for the Bank of Japans Policy Board when it meets at the end of the week. With the publication of theBoard members updated forecasts for GDP and inflation due at the end of the month, we expect this meeting will beuneventful, barring any implosion in financial markets. (David Rea)

China

It is likely to be a quiet week in China due to the National Day Holiday (Saturday 1st - Friday 7th). Chinas financialmarkets will also close for the whole week. (Qinwei Wang)

Other Asia-Pacific

The Reserve Bank of Australia (RBA) announces its latest cash rate decision this week (Tuesday). Recent RBA

speeches reiterated concerns about the medium-term outlook for inflation, but this should be outweighed by

downside risks for global growth. On balance, we expect the RBA to remain in wait-and-see mode.


10/14

Otherwise, several countries are scheduled to publish their latest CPI data, including Indonesia and Thailand today

(05.00 BST) and Korea on Tuesday. We expect inflation to have eased slightly across most of the region, in large

part due to falling commodity prices. Finally, September manufacturing PMIs for Korea, Taiwan, India and

Australia will be released by Tuesday. (Sukhy Ubhi)

Other Emerging Markets

In Latin America, Peru is due to make an interest rate announcement on Thursday evening. Despite calls from some

quarters for a cut, we believe that with inflation remaining above its upper tolerance band, and growth showing an

encouraging bounce in July after a below-expectations June, policymakers will probably leave rates unchanged at

4.25% for a fifth successive month. (Michael Henderson)

Polish policymakers meet on Wednesday and are likely to keep interest rates unchanged at 4.5%. The growth

outlook has, of course, deteriorated rapidly over the past couple of months but the sharp sell-off in the zloty means

that the bar for rate cuts in the very near term is high. Instead, we expect the first cut to come in early 2012, when

inflation should be falling back to target. We have pencilled in 50bps of cuts to 4% in Q1. (Neil Shearing)

Key Data and Events

Mon 3rd 00.50 Jpn Tankan Large Manufacturers (Q3)

00.50 Jpn Tankan Large Manufacturers Outlook (Q3)

00.50 Jpn Tankan Non-Manufacturers (Q3)

00.50 Jpn Tankan Non-Manufacturers Outlook (Q3)

00.50 Jpn Tankan Large All Manufacturers Capex (Q3)

05.00 Idn CPI (Sep)

05.00 Tha CPI (Sep)

06.00 Jpn Vehicle Sales (Sep)

09.30 UK CIPS/Markit Report on Manufacturing (Sep)

15.00 US ISM Manufacturing Index (Sep)

15.00 US Construction Spending (Aug)

16.00 EZ Euro-zone Finance Ministers Meeting

Commodities

The last few weeks have seen highly publicized liquidation in the precious metals with one article

this weekend pointing out open interest in Gold and Silver back to levels in 2009.Gold, Silver

Speculative Longs Plunge To March 2009 Levels

But the damage has not been limited to the precious metals and copper, the broad indices reveal more
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11/14

damage across the board. Chart is of the Rogers Intl. Agriculture ETN. No visible support for at least

another 12 to 15%.

The CRB index is at a more critical juncture. (note those lines are drawn free hand and are suggestive

more than precisely accurate)

The commodity price action can be explained by deeply embedded in inflation expectations andthe sharp revision of global economic growth forecasts. A reduction of potential inflation

expectations will be welcome in Asia and increases the likelihood that contractionary policies in

China and India will be eased. The equity markets in particular will react positively to anyprospect of renewed growth in those countries.


12/14

Energy

Two articles from Carpe Diem on Oil and Gas that dont have ny particular message for the immediateprice action but I believe do have meaning for the long term.

How N. Dakota Became Saudi Arabia: Interview with Harold Hamm, Discovererof Bakken Oil

Intoday's WSJ, Steve Moore interviews Harold Hamm, the Oklahoma-based founder and CEOof Continental Resources (America's 14th-largest oil company), and the original discoverer ofthe gigantic Bakken oil fields of Montana and North Dakota. There are lots of gems from Mr.

Hamm, here are a few:

1. Hamm came to Washington to spread a needed message of economic optimism: With theright set of national energy policies, the United States could be "completely energy independent

by the end of the decade. We can be the Saudi Arabia of oil and natural gas in the 21st century."

2. "President Obama is riding the wrong horse on energy." We can't come anywhere near thescale of energy production to achieve energy independence by pouring tax dollars into "greenenergy" sources like wind and solar. It has to come from oil and gas.

3. Since 2005 America truly has been in the midst of a revolution in oil and natural gas, which isthe nation's fastest-growing manufacturing sector (see chart above showing oil production inNorth Dakota increasing more than four-fold since 2005).

4. How much oil does Bakken have? The official estimate of the U.S. Geological Survey a fewyears ago was between four and five billion barrels. Mr. Hamm disagrees: "No way. We estimatethat the entire field, fully developed, in Bakken is 24 billion barrels."

5. Mr. Hamm believes that if Mr. Obama truly wants more job creation, he should study NorthDakota, the state with the lowest unemployment rate in the nation at 3.5%. He swears thatnumber is overstated: "We can't find any unemployed people up there. The state has 18,000
http://mjperry.blogspot.com/2011/10/how-north-dakota-became-saudi-arabia.htmlhttp://mjperry.blogspot.com/2011/10/how-north-dakota-became-saudi-arabia.htmlhttp://mjperry.blogspot.com/2011/10/how-north-dakota-became-saudi-arabia.htmlhttp://online.wsj.com/article/SB10001424052970204226204576602524023932438.htmlhttp://online.wsj.com/article/SB10001424052970204226204576602524023932438.htmlhttp://online.wsj.com/article/SB10001424052970204226204576602524023932438.htmlhttp://online.wsj.com/article/SB10001424052970204226204576602524023932438.htmlhttp://mjperry.blogspot.com/2011/10/how-north-dakota-became-saudi-arabia.htmlhttp://mjperry.blogspot.com/2011/10/how-north-dakota-became-saudi-arabia.html


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unfilled jobs. And these are jobs that pay $60,000 to $80,000 a year." The economy isexpanding so fast that North Dakota has a housing shortage. Thanks to the oil boomContinental pays more than $50 million in state taxes a yearthe state has a budget surplus andis considering ending income and property taxes.

6. Mr. Hamm calculates that if Washington would allow more drilling permits for oil and natural

gas on federal lands and federal waters, "I truly believe the federal government could over timeraise $18 trillion in royalties." That's more than the U.S. national debt, I say. He smiles.

The Shale-Gas Boom Comes to the U.K. and How The Multiplier Impact CanRevive Manufacturing

THE ECONOMIST--"On September 21 Cuadrilla Resources, the first firm to drill for shale gas

in Britain, estimated that 200 trillion cubic feet of gas lie in an area near the seaside town in

northwest Englandnearly 40 times previous projections of all of Britains shale resources and,

in theory, four times as much gas as is still recoverable from the North Sea. Cuadrilla hopes to

drill 400 wells in Lancashire in the next decade."

WALL STREET JOURNAL-- "With Cuadrilla's announcement, shale gas goes from something

ignored by policy elites on the grounds that it can only be developed in America, to something

that is happening in real time in Europe."

And here's a key point made by Alan Riley in the WSJ article:

"One of the overlooked consequences of the U.S. shale-gas revolution has been the multiplier

impact that access to large quantities of cheap gas can have on the broader U.S. economy. Shale

gas could lead to a revival of the American steel and chemicals industry, and of energy-intensive

manufacturing. It may also push food prices lower, since natural gas provides 80% of the

constituent of most modern fertilizer."

MP: In addition to the shrinking manufacturing wage gap with countries like China, the"multiplier impact" from abundant, cheap natural gas could be another major factor in thepending renaissance of American manufacturing.

I draw two conclusions from these articles:

First the age of natural gas is just beginning. The world has largely sat back and watched as new US

energy technology has led to the explosion of known reserves in the US. Now the UK and China both

have begun to make big discoveries and soon Europe, Africa and other Asian countries will begin to seeexploration and global reserves should explode. Industries that serve this technology will benefit for

many years. Furthermore the geo politics of the middle east and Russia will be materially changed.

Second if the administration in power supports the development of these new resources the US can

sharply reduce current account deficits, increase job growth, improve tax receipts reduce US dependence

on hostile or unstable foreign energy producers.

I see no excuse for failure to enthusiastically pursue development of supportive energy policies . BBL
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Weekly 10022011 as the World Churns

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